"The Tax Benefits of Separating Alpha from Beta” was named the winner of the CFA Institute Financial Analyst Journal’s 2020 Graham and Dodd Award, recognizing its contribution to the practice of investment management. Read more from the CFA Institute.
Separating active returns (i.e., alpha) from market exposure (i.e., beta) has recently received significant attention in the investment community. Whereas most of the focus has been on pre-tax returns, we show that the separation of a portfolio into an active long-short portfolio and a passive index portfolio can have significant tax benefits. The turnover of a traditional active strategy causes capital gain realizations on both the active and the market components of the strategy returns. In contrast, the turnover of a strategy that separates alpha from beta is aimed at the active exposures and enables the deferral of capital gain realizations on the passive market exposure.
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